Forbes CommunityVoice™ allows professional fee-based membership groups ("communities") to connect directly with the Forbes audience by enabling them to create content – and participate in the conversation – on the Forbes digital publishing platform. Each topic-based CommunityVoice™ is produced and managed by the group.

Opinions expressed within Forbes CommunityVoice™ are those of the participating individuals.

The Great Recession of the mid-2000s forced us to view economics, banking, wealth and security in new ways. The concept of asset protection, already a growing area, saw an explosion in popularity, which has given rise to an ever-evolving cat and mouse game between creditors and debtors and their respective advisors. Meanwhile, distrust in banks and governments fueled the creation and rise of Bitcoin, which spurred interest in new digital currencies relying upon similar technologies.

My firm practices asset protection, catering to professionals, entrepreneurs and investors who seek both domestic and international asset protection strategies. In this article, I will discuss the technology underlying virtual digital currencies and how it might play a role in asset protection.

What is cryptocurrency?

Virtual digital currencies (or “cryptocurrencies”) operate on decentralized databases called blockchains. Blockchains function as publicly distributed ledgers, verifying and permanently recording asset transfer transactions between buyers and sellers without the need for a trusted third party. These technological breakthroughs are enabling the new, digitized economy.

Blockchain introduced technology that solved a long-standing computer science problem, known as the “double-spend” problem, eliminating the potential for an unscrupulous or unknowing buyer to spend the same money more than once. A “trustless” ledger system employs public key cryptography to ensure transaction inputs are not duplicated. There is no need for third-party intermediaries. Transactions are grouped and recorded in blocks, then linked to the last block in the chain. A system of consensus and cryptography validate each of the transactions.

In the Bitcoin protocol, transactions are validated by “miners” who receive Bitcoins as a reward (or premium) for their processing efforts. Once a sufficient consensus of miners has validated the cryptographic hash of a transaction, the information is recorded in a “block.” Successive blocks of transaction data are built upon previous blocks to form a chain – hence the name “blockchain.” The process of recording transactions in interconnected blocks creates an immutable, time-stamped ledger that is not subject to manipulation by any person, company or government.

With the absence of a middleman and by existing on a distributed ledger in cyberspace, digital currencies are effectively borderless and can represent stores of value in all parts of the globe. Bitcoin, the most recognized digital currency, is not controlled by any centralized government entity or organization, but instead by willing participants (generally the miners) that build and maintain the chain.

Blockchain transactions are semi-anonymous – or “pseudonymous.” Each transfer of value on the ledger is publicly viewable, but parties to the transaction are known only by a string of numbers serving as a public key address. (Bitcoin transactions are publicly viewable in real time at www.blockchain.info.) Anonymous users manipulate ownership and transfer of Bitcoin with their private key, a separate string of numbers generally kept secret. This ability to engage in transactions pseudonymously (coupled with the absence of intermediaries) makes Bitcoin the currency of choice for gray and black market transactions. The infamous Silk Road website relied upon Bitcoin payments and, more recently, Bitcoin has become the preferred payment for cybercriminals, such as those engaged in the rising epidemic of cyber-ransom.

What is legitimate asset protection?

The pseudonymous (and borderless) nature of digital currencies inevitably leads to a discussion of using Bitcoin for asset protection. The assumption is that, with anonymity, ownership of cryptocurrencies could be an effective and efficient means to hide wealth. There are a couple of flaws with this assumption, the first of which is what constitutes legitimate (and defensible) asset protection.

Legitimate asset protection involves strategic planning to protect against unknown future claims. This point is lost on misinformed debtors who seek protection after they’ve defaulted on a debt, been sued or face divorce. Reactionary transfers – those made with intent to avoid a creditor – are subject to being unwound by courts as “fraudulent transfers.” For maximum effectiveness, implementation of an asset protection plan must begin before creditor clouds start to form.

A key but often overlooked element of effective asset protection is transparency. If you are sued and become subject to a money judgment, you will be asked about – and required to disclose – details about your assets, including bank accounts, investments, and real and personal property ownership. Digital currency ownership would be subject to complete disclosure. The inquiry would not be limited to a current snapshot. An effective creditor’s lawyer will look at account histories and title chains and scrutinize transfers made during and immediately before a lawsuit to flush out potential fraudulent transfers.

Conclusion

In the digital currency world, transactions are forever documented on the blockchain. The blockchain’s immutable, time-stamped ledger renders manipulation of transfer and ownership data practically impossible. Since the timing of transfers is a key component to legitimate asset protection, a blockchain record of transfers can be critical in either validating or undermining the legitimacy of strategic asset transfers.

Could Bitcoin and other digital currencies be useful in asset protection? Sure, but like cash hidden under a mattress, failure to disclose such ownership may constitute perjury and subject a debtor to contempt proceedings. Using cryptocurrencies with the intention of concealing ownership is not legitimate asset protection. It is simply lying and fraud, which can and should lead to harsh consequences.

This is not to suggest cryptocurrencies have no place as one component of legitimate asset protection. In fact, Bitcoin’s unique nature, as a store of value existing on a public, immutable, time-stamped ledger, coupled with its relative ease of use (particularly across borders) and the high speed at which transactions are settled, offers promise for incorporating cryptocurrency ownership into comprehensive asset protection planning. The intent, however, should not be to hide assets and fly under the radar, but instead to document the occurrence and timing of transactions. In this manner, blockchain transactions might validate legitimate planning with legally defensible transparency.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

Forbes Legal Council is an invitation-only, fee-based organization for partners of prestigious law firms and experienced chief legal executives. Find out if you qualify at www.forbeslegalcouncil.com/quality.